Banks in Britain are poring over relationships with financial partners in fear of falling foul of fresh international sanctions against Iran.
As part of a dispute between Western powers over Iran's nuclear programme, Britain has ordered its lenders to cut all ties with the country.
Though UK banks largely ended their direct business with Iran in the last decade, their so-called correspondent banking relationships with banks who do still deal with Iran could cause headaches for risk managers looking to save their employers a visit from regulators.
Correspondent banks provide services for an overseas bank, such as establishing accounts or clearing, giving the overseas bank's customers access to an international network they might not otherwise have.
Transactions involving banks in Eastern Europe, Turkey and Germany have tended to attract more attention from regulators looking for links to Iran, said Michael Zolandz, an attorney with law firm SNR Denton in Washington who advises banks on political and regulatory issues.
British banks will face scrutiny from regulators not only for their own behaviour but for the behaviour of foreign banks that they deal with.
Most of the Iranian risk is really an interwoven or interlocked risk, Zolandz said. It's not like major financial institutions are sitting on the other side of the table from
On November 21, in a coordinated action with the United States and Canada, Britain ordered all financial institutions to stop doing business with their Iranian counterparts, including the Iranian central bank.
On New Year's Eve, President Barack Obama signed into law new U.S. sanctions on Iran's Central Bank, that could penalise anyone using the banking system to make payments for Iranian crude. European Union diplomats have indicated they will soon move toward an embargo of Iranian oil.
The sanctions are in response to a November 8 United Nations nuclear watchdog report which made detailed claims about Iran's development of a nuclear weapon design. Iran says its nuclear programme is peaceful and deplores sanctions.
A GAME CHANGE
Until financial sanctions against Iran came into force, London was seen as a convenient transfer point for Iranian money seeking to enter the United States, proving a lucrative business for several major British banks.
In the last three years however, they have had to pay hefty fines to American authorities as the U.S. government focused on cutting off Iran's financial flows.
In 2009, Lloyds TSB
The bank paid a $350 million fine, and Credit Suisse, Barclays
They were after that deal, and someone obviously didn't particularly think the downside risk of enforcement was that great, said Michael P. Malloy, a former U.S. Treasury lawyer who consults with banks on regulations.
Now, however, the extensive nature of the new sanctions - as well as the piecemeal way in which they are being implemented in similar but separate actions by the U.S., UK, and European Union - has banks worried.
Obviously, we're going to have to be more careful than the previous regulatory framework expected us to be, said one risk manager for a British bank.
World-Check, which is owned by Thomson Reuters, operates a global risk database collating current information on sanctions and changing regulations, and monitoring emerging risks.
John Solomon, director of threat finance research there, said the company was approached by several clients after the U.S. passed its Iran sanctions act in 2010. They were alarmed and frustrated, he said, by the lack of information provided by governments around the world to meet the due diligence standards demanded by the new law.
Governments have issued far-reaching sanctions that hold businesses accountable for their indirect economic ties with Iran, based on whether that nexus is knowable and in the public domain, Solomon said. This is a game change.
Outside of London, other banks in Europe are taking steps to comply.
A Deutsche Bank spokesman said the bank decided in 2007 to wind down its Iranian ties
Switzerland's Banque de Commerce et de Placements (BCP) closed its Iranian accounts in July 2010, days after the U.S. passed an act targeting foreign banks dealing with a slew of banned Iranian entities.
The Western consensus against Iran, once spotty, has strengthened and is unlikely to ebb, experts said, and the tolerance for profiting from Iran has decreased in turn.
But banks will comply with regulations that limit their business opportunities only if they face significant penalties for not doing so, said Anthea Lawson, who heads the banks and corruption campaign at Global Witness, a watchdog that aims to fight corruption by enforcing rules on money laundering.
Sanctions get slapped on all the time, but they have to be made meaningful with penalties for those who are not enforcing them, Lawson said. I do not sense a broad change toward really getting to grips with ensuring that this is enforced.
(Reporting by Yeganeh Torbati; Editing by Peter Graff)